AP Microeconomics Unit 2

allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

Competitive market

a market that has many buyers and sellers

Demand schedule

shows how much of a good or service consumers will want to buy at different prices

Quantity demanded

actual amount of a good or service consumers are willing to buy at some specific price

Demand curve

graphical representation of the demand schedule. It shows the relationship between quantity demanded and price

Law of demand

says that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service

Shift of the demand curve

change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position denoted by a new demand curve

Determinants of Demand

Factors other than price that determine the quantities demanded of a good or service: Taste and Preferences, changes in Income, prices of related goods, Expectations of a price change, # of buyers

Substitutes

rise in the price of one good leads to an increase in the demand for the other good

complementary goods

Goods that are commonly used with other goods - a rise in the price of one good leads to a decrease in the demand for the other good

Normal good

rise in income increases the demand for a good- the normal case

Inferior good

rise in income decreases the demand for the good

Quantity supplied

actual amount of good or service producers are willing to sell at some specific price

Supply schedule

shows how much of a good or service producers will supply at different prices

Supply curve

shows the relationship between quantity supplied and price

Determinants of Supply

Factors other than price that determine the quantities supplied of a good or service: technology, International events/natural disasters, Gov't policies (tax- less, subsidy- more), Cost of resources, number of sellers

Excise tax

tax on the sale of a good or service

Subsidy

money from the government to help a producer continue to operate

market equilibrium

quantity demanded by buyers equals the quantity supplied by sellers, where supply and demand curves meet

equilibrium price

price at equilibrium

Equilibrium quantity

quantity at equilibrium

Market Disequilibrium

A condition where the market is not at equilibrium

Surplus

excess supply when the price is above the equilibrium price Qs>Qd

Shortage

excess demand, price is below equilibrium price Qd> Qs

Individual consumer surplus

the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyers willingness to pay and the price paid

Total consumer surplus

sum of individual consumer surpluses of all the buyers of a good in a market. Total consumer surplus is equal to the area below the demand curve but above the price

Consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Individual producer surplus

net gain an individual seller gets from selling a good, it is the difference between the price received and sellers cost

Total producer surplus

market sum of individual producer surpluses of all sellers of a good in the market

Producer surplus

individual and producer surplus

Utility

a measure of the satisfaction the consumer derives from consumption of goods and services

Marginal utility

changed in the total utility generated by consuming one additional unit of that good or service

law of diminishing marginal utility

the rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

Budget constraint

requires that the cost of a consumer's consumption bundle be no more than the consumers income

utility maximizing rule

The principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility. MUx/Px = MUy/Py

Price ceiling

a maximum price sellers are allowed to charge for a good or service

Price floor

a minimum price buyers are required to pay for a good or service

Deadweight loss

Loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity

Black market

a market in which goods or services are bought and sold illegally- either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling - illegal subletting

Quotas

The upper limit on the quantity of some good that can be sold in a foreign country. The total amount of the good that can be legally transacted- quota limit- only people with licenses can sell the good- foreign currency purchases, fish catches, to avoid undesirable outcomes

Elasticity

How much consumers/producers respond to changes in price

Elasticity of demand

the ratio of the percent change in the quantity demanded to the percent change in price as we move along the demand curve. Elasticity of demand= % change in Qd/ % change in price

Perfectly inelastic

when the Quantity demanded (Qd) does not respond at all to changes in the price. The demand curve is a vertical line, and the elasticity of demand is equal to zero.

Perfectly elastic

when any price increase will cause the quantity demanded to drop to zero, the demand curve is a horizontal line, and the elasticity of demand is equal to infinity

Elastic

elasticity of demand is greater than one, and this means that consumers are very responsive to a change in price and will definitely change their buying behavior

Total revenue

the total value of sales of a good or service. It is equal to the price multiplied by the quantity sold

Price effect

after a price increase of a good, each unit sold sells at a higher price, which tends to raise revenue

Quantity effect

after a price increase of a good, fewer units are sold, which tends to lower revenue

Factors that affect elasticity of demand

amount of available substitutes, necessity vs. luxury, share of income spent, time needed to adjust to a price change

Cross-Price Elasticity of Demand

Looks at two goods and measures the effect of the change in one good's price on the quantity demanded of the other good.

Cross-price elasticity of demand= % change in quantity of A demanded/ % change in price of B

Income elasticity of Demand

measures the how the change in the demand for a good is affected by a change in someone's income Income elasticity of demand= % change in quantity demanded/ % change in income

Income elastic

when income rises, the demand rises faster than income- income elasticity of demand is greater than 1 (luxury goods like travel and second homes)

Income inelastic

when income rises, the demand for the good rises, but slower than income- the income elasticity of demand is less than 1 (necessities like food and clothing)

Economic agents

Consumers, Producers, and Governments. Economic decision-makers

demand

Consumer willingness and ability to buy products

Consumer Choice Theory

The theory relating consumer demand curves to consumer preferences.

Market Demand

the demand by all the consumers of a given good or service

Substitution Effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

Income Effect

the change in consumption/purchasing power resulting from a change in real income

profit

total revenue minus total cost

supply

The quantity of something that producers have available for sale

Law of Supply

producers offer more of a good as its price increases and less as its price falls

marginal cost

the cost of producing one more unit of a good

Tariff

A tax on imported goods

market supply curve

a graph of the quantity supplied of a good by all suppliers at different prices

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

Unit Elastic

when the percentage change in price and quantity demanded are the same

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Superior/luxury good

Goods that make up a larger share of consumption as income rises

Might not be consumed at all below a certain income level

perfect competition

the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

producer surplus

The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.

subsidy

A government payment that supports a business or market

productive efficiency

The production of a good in the least costly way

Protectionism

Economic policy of shielding an economy from imports.

price floor

A legal minimum on the price at which a good can be sold. Must be set above the market equilibrium price